We have just written our monthly report to investors of The Montgomery Private Fund and the outlook for the large Materials stocks is not expected, in our view, to improve in the short term. Chinese steel mills don’t see demand picking up. Daily steel production falling 5% every two weeks. While blast furnaces are slowing down, capacity is high and shut downs not happening. We have noted already that inventory remains double that of 2007.
WHat does this mean? Prices can, and we expect will, continue to go down. Not is straight line of course but the outlook appears to be deteriorating even further for the widely held Materials stocks.
In China, steel prices are already hitting 2008 lows.Observers say Iron ore inventory levels at ports is still quite high
Our reading on Steel demand and after breaky with a member of the team at one of the the worlds largest short selling fund is that steel demand will continue to be weak into 2013. I think expectations for a recovery in the short term simply represent wishful thinking by those in denial.
Expects flat to declining steel demand potentially into next year. No consensus on where the new leadership will set the policy. Will need government stimulus to generate steel demand growth into next year.
In terms of Chinese production analysts on the ground in China reckon there is approx 350-400mt iron ore production in China. Domestic producers are still producing but have not been selling the product, hence stock remains quite high.
All of the above of course is noise. Massive oversuppy and declining demand will continue to be the theme for some time and until we see balance sheets and cash flow statements improving for ship builders, cement makers and steel makers. We think investors who sold their BHP, RIO and FMG back in October last year (after speaking with their adviser) when we first started our warnings, should ask their advisers to keep an eye on the quarterlies of the major steel customers.